Warsh's "Three-Step" Plan to Push the Fed Back to Rate Cuts
0xBroomberg
China Securities analysis argues new Fed Chair Kevin Warsh plans a three-step campaign to unify the FOMC's divided stance, targeting a Q4 restart of the rate-cut trade — but success hinges on whether a newly staffed research group can deliver the right conclusions.
What kind of mess did Warsh inherit?
The June dot plot revealed wide disagreement among FOMC members on the rate path — no internal consensus.
Warsh faces three headwinds at once: questions about his independence, shallow relationships with sitting governors, and high coordination difficulty.
This means → he cannot simply order a cut. He needs an indirect route — build a tool, swap the framework, then push for the pivot.
Step one: what does the July staffing move achieve?
Warsh plans to make key personnel appointments to the Fed's research working group in July, elevating its policy status.
In plain terms = he can't quickly win over veteran governors, but he *can* place his people inside the working group and shape decisions through its research output.
Warsh has already scrapped forward guidance — the Fed no longer signals its next move in advance. That makes future policy calls heavily dependent on the working group's reports — markets may pay more attention to the group's conclusions than to individual governors' speeches.
Step two: what is the new framework's core logic?
Warsh plans to ride the AI-revolution narrative and introduce a supply-side framework that judges policy by productivity and wages rather than the traditional employment-and-inflation gauges.
Short-term logic: if labor productivity keeps rising → it offsets wage-driven inflation pressure → the Fed gains more room to ease.
The analysis cites the 1995–1998 Greenspan era as precedent — the economy was strong, wages were rising fast, yet sustained productivity gains broke the wage-price link, and the Fed cut a cumulative 125 basis points. When productivity peaked in 1999, the Fed promptly reversed to hikes.
This means → the framework's medium-to-long-term implication is actually the opposite: if productivity gains persist, the real neutral rate shifts higher, and longer-run room for cuts narrows.
Step three: what triggers the Q4 rate-cut trade?
Once the working group publishes its new-framework conclusions, the analysis expects the dovish camp to gain majority support.
Current conditions are the mirror image of 1999: productivity growth is still climbing, wages have not surged, and tech firms are not yet competing aggressively for labor — the Fed has room to adjust flexibly.
If payrolls and CPI soften again in the second half, that further supports the easing narrative.
What does this mean for markets?
Building and accepting a new framework takes time. Combined with high rates, a strong dollar, rising tech anxiety, and approaching midterm elections, Q3 volatility risk remains elevated.
As liquidity conditions improve later, Treasuries, gold, and tech-linked narratives stand to benefit.
In plain terms = whether the rate-cut trade restarts smoothly in Q4 comes down to one thing — can the working group's conclusions pull the FOMC onto the same page?
Content is for reference only, not financial advice.